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Bear Of The Day: Kraft Heinz (KHC)


Kraft Heinz (KHC) continues to disappoint investors with continuous brand write-downs, pessimistic management guidance and a 36% dividend cut. KHC has lost almost 40% of its value since the start of 2019 and over 56% of it market cap flushed down the toilet in the last 52-weeks. Sell-side analysts continue to drop EPS estimates with management’s sizable downward revisions propelling KHC into a Zacks Rank #5 (Strong Sell).

Kraft Heinz is facing substantial systemic issues that management has not seemed to be able to alleviate in recent quarters. In fact it appears the problems are accelerating.

The Brazilian private equity firm, 3G Capital, merged Kraft and Heinz with the help of investment guru Warren Buffet and his firm Berkshire Hathaway. This merger occurred in July of 2015 and was able to initially provide positive results with the new 3G managements cost cutting, margin expanding measures.

The primary issue with this strategy is the quintessential private equity move. They go into a firm gut management and lean up operations to eventually sell off for a profit. Unfortunately it didn’t work for a company of this size with such solidified brand names.

It appears that Kraft cut its cost too far leading to brand deterioration. The company has had to continuously write-down its brand over the last few years with the last 6 months exemplifying over $1.2 billion in impairment charges.

Kraft Heinz net income fell a drastic 51.4% year-over-year in the first half of 2019 on sales that were down over 51% compared to the first half of 2018. Margins have continued to deteriorate, and I don’t see this trend changing anytime soon under current management.

Take Away

Private equity firms don’t know how to operate a growing brand-based business, they are too focused on short-term profitability. Consistent brand impairment charges are a sign that this company doesn’t expect to recoup market share anytime soon and that profitability may have an expiration date.

The best thing that could happen to Kraft Heinz is a buyout from a more properly run CPG company with management that is willing to continue to grow its long-standing brands oppose to turning a short-term profit.

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